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Emkay Global upgrades Havells to buy; share price up 3%

The brokerage raised its target multiple to 40x FY22E EPS from 35x, with a revised price target of Rs 715 as it sees recovery in revenue growth, which has been lagging for the last four quarters.

February 25, 2020 / 11:25 AM IST
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Shares of Havells India gained 2.7 percent intraday on February 25 after Emkay Global upgraded the stock to buy on likely revenue recovery from current quarter onwards.

The stock rose more than 6 percent in last three days. It was quoting at Rs 637.90, up Rs 10.90, or 1.74 percent on the BSE at 1038 hours IST.

"After upgrading Havells to hold recently, we are further upgrading the stock to buy in the wake of positive feedback from recent channel checks which corroborate our estimates and projections that bake in a gradual revenue recovery from Q4FY20," said Emkay Global.

The brokerage further said its channel checks suggested that Havells had lost market share in Fans in Q2 and Q3, while it has started to recover from December 2019.

Revenue growth in the core business (ex-Lloyd) has started to rebound from Q4, with revenue growth seen in Fans as well, it added.

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Emkay feels favorable base from Q4FY20 and moderated growth assumption for the ensuing quarter and a gradual uptick expected in government spending from Q1FY21, which has direct co-relation with 30 percent of Havells' revenues, should lead to growth from Q4FY20.

The brokerage raised its target multiple to 40x FY22E EPS from 35x, with a revised price target of Rs 715 as it sees recovery in revenue growth, which has been lagging for the last four quarters.

"We are baking in revenue/EBITDA/PAT CAGR (FY20-22E) of 13/15/19 percent," it said.

Havells had seen significant re-rating from November 2016 to August 2018 (from 30x to 41x one-year forward PE) despite an EPS CAGR of 4 percent over FY16-19. The valuation re-rating was driven by: 1) sustained revenue growth (13 percent CAGR; ex-Lloyd); 2) market share gain from unorganized players post demonetisation and GST; 3) acquisition of Lloyd; and 4) government spending over infra and other projects.

The de-rating seen in the last six months is attributable to 20 percent EPS cut. Emkay believes that downside is limited in the stock as its channel checks suggest a rebound in growth in the core business has started to reflect in Q4.

However, sustained underperformance in the core business and inability to turnaround of Lloyd by safeguarding market share could risk current valuations, the brokerage said.

Key risks would be delayed macro recovery, sustained weak performance in the core business, longer-than-expected time for market share rebound in Fans, lack of acceptance of new product launches, continued market share loss in Lloyd, adverse commodity prices, and prolonged disruption due to Covid-19 in China, it added.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Moneycontrol News
first published: Feb 25, 2020 11:25 am

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